How serious is Putin 2.0?

Mar 02, 2012

Vedomosti.ru

Oleg Tsyvinsky

Sergei Guriyev

Alexei Navalny, Russia's vocal anti-corruption campaigner. Source: AP

The fight against corruption is at the top of Russia’s political agenda and one of the key points of Vladimir Putin’s electoral platform. Unfortunately, as he himself has admitted, that fight has not yet yielded any tangible results. Can corruption in Russia be tackled and if so, how? We often hear that even if there is a genuine desire at the top to fight corruption, that fight is doomed to failure.

But it isn’t. Technological advances in
recent years have provided anti-corruption fighters with an entirely new set of
tools. The spread of the internet and the development of social networking make
it possible to use modern crowd-sourcing technologies. In other words, even if
there are not enough investigators and police officers, citizens themselves can
gather, disseminate and discuss basic information. One new anti-corruption
project called BondRaspil shows that a specific type of corruption can be
conquered very quickly. The key to success is transparency and the sense that
punishment is unavoidable.

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As for transparency, there are serious
grounds for optimism. The best known example of the new approach to fighting
corruption is Alexei Navalny’s Raspil project. No one person can track all the
dodgy tenders being held in Russia. But a community of concerned citizens who
tip each other off about suspect state procurement deals can collect such
information and make it public.

In October, some anonymous traders opened a
website called bondraspil.ru, which monitors non-market deals in the Russian
bond market. The BondRaspil site posts all the suspect transactions, indicating
by how many percentage points the price of the deal differs from the market
price, that is, how much money the parties to these deals have pocketed. The
authors of the site are prepared to admit their mistakes and welcome comments
from bond market traders.

How are such “split” deals in the liquid
bonds market structured? A bond is a commodity for which prices are quoted
daily (BondRaspil focuses on government bonds and first- and second-tier
bonds). Therefore, a non-market deal can immediately be spotted on the bond
market. BondRaspil has calculated that since 19 October, partners in such deals
have made a substantial profit: deviations from the market prices amounted to
309 million rubles.

How dangerous are these deals? The traders
who make them not only steal money from their employers, but also undermine
confidence in market prices and the financial market as a whole. Liquidity is
reduced and the market becomes less stable. If the price of the deal affects
the value of the bonds as an asset, the consequences can be even more serious
because market prices are important benchmarks for other transactions. For
example, non-market deals can raise or lower the market price of the
collateral, defer a margin call or help a bankrupt bank “meet” its capital
requirements.

Luckily, the work of BondRaspil activists
quickly caught the eye of the media, the Federal Financial Markets Service
(FSFR) and the stock exchange. The FSFR informed them in an official letter
that their information is being considered. Unsurprisingly, the number of dodgy
deals dropped sharply, according to the activists. They amounted to 209 million
rubles in December and to just 10 million rubles between 12 January and 10
February. In addition, while in November and December deal prices differed from
market prices by hundreds of basic points (for a number of deals by 300-400
points and for one, 600 points), in January the maximum deviation was 150
points and in February it was 40 points. The average deviation was 156 points
in December, 58 in January and 31 in February.

Of course, BondRaspil is a somewhat unusual
example of the fight against corruption. The community of bond traders is
close-knit, with everybody knowing everybody else. The regulator and the
exchange know all the traders. That is why this type of deal was conquered so
quickly. But on the other hand, it is an important precedent. First, it turns
out that it is possible to fight corruption with transparency. Second, market
agents must know that punishment is inevitable. In this case, the potential
culprits had no doubt that the FSFR and MICEX are interested in curbing
non-market deals. The fact that BondRaspil’s information became widely known
sends a powerful signal to would-be violators.

Confidence that punishment is inevitable is
precisely what is lacking in the fight against corruption in other areas.
Although society has amassed mountains of information about corrupt acts
(published by enthusiasts on the internet), the authorities have not been in a
hurry to respond. Indeed, critics mistrust Vladimir Putin’s words about
fighting “systemic corruption” because society is not convinced he is truly
determined to see the reported facts investigated.

However, in the next few weeks we will see
whether the “new Putin” is ready to take on corruption. Declarations by the
heads of state companies on their property and shares in companies (including
offshore ones) must be submitted shortly to four agencies. Obviously, these
declarations will be leaked to the press and will be widely discussed on the
internet. If they turn out to be implausible, they will of course trigger a
wave of further exposures. It is likely that Russian society will learn about
some serious conflicts of interest at the very top. The reaction to these
revelations will be a measure of how serious “Putin 2.0” is.

The authors are respectively the rector of the Russian
Economic School and professor at Yale University and the Russian Economic
School